Tilly’s, Inc. reported a loss against a profit in the third quarter on higher promotions and a 9 percent decline in sales. Sales were at the lower-end of the retailer’s guidance although the loss was lower than expected. The action-sports chain expects Q4 comps to decline between 9 percent and 6 percent.
Sales of $166.5 million in the quarter compared with company guidance in the range of $166 million to $171 million. The net loss of 3 cents compared with guidance in the range of a loss between 11 cents and 5 cents.
“Our third quarter results represent a sequential improvement over the first and second quarters of the fiscal year. We continue to work towards protecting product margins, managing inventories and controlling operating expenses amid a continuing difficult economic environment, particularly for our young customer demographic,” commented Ed Thomas, president and chief executive officer. “Although more promotionally driven than in years past, we were pleased to produce comparable net sales growth compared to last year over Black Friday weekend.”
Operating Results Overview
Fiscal 2023 Third Quarter Operating Results Overview
The following comparisons refer to the company’s operating results for the third quarter of fiscal 2023 ended October 28, 2023 versus the third quarter of fiscal 2022 ended October 29, 2022.
- Total net sales were $166.5 million, a decrease of $11.4 million or 6.4 percent, compared to $177.8 million last year. Total comparable net sales, including both physical stores and e-commerce (“e-com”), decreased by 9.0 percent.
- Net sales from physical stores were $132.4 million, a decrease of $9.1 million or 6.4 percent, compared to $141.5 million last year, with a comparable store net sales decrease of 9.1 percent. Net sales from physical stores represented 79.6 percent of total net sales both this year and last year. The company ended the third quarter with 249 total stores compared to 247 total stores at the end of the third quarter last year.
- Net sales from e-com were $34.0 million, a decrease of $2.3 million or 6.2 percent, compared to $36.3 million last year. E-com net sales represented 20.4 percent of total net sales both this year and last year.
- Gross profit, including buying, distribution, and occupancy costs, was $48.7 million, or 29.3 percent of net sales, compared to $54.6 million, or 30.7 percent of net sales, last year. Buying, distribution, and occupancy costs deleveraged by 90 basis points, despite being $1.0 million lower than last year primarily due to a decrease in distribution costs resulting from reduced freight costs, partially offset by higher occupancy costs resulting from two net additional stores compared to last year. Product margins declined by 50 basis points primarily due to increased markdowns and estimated inventory valuation reserves.
- SG&A expenses were $51.2 million, or 30.8 percent of net sales, compared to $48.3 million, or 27.1 percent of net sales, last year. Primary SG&A increases were attributable to non-cash store impairment charges of $1.7 million, marketing expenses of $0.7 million, and combined store and corporate payroll and related benefits expenses of $0.7 million.
- Operating loss was $(2.5) million, or (1.5) percent of net sales, compared to operating income of $6.3 million, or 3.6 percent of net sales, last year, due to the combined impact of the factors noted above.
- Other income was $1.3 million compared to $0.7 million last year, primarily attributable to earning significantly higher rates of return on our marketable securities compared to last year.
- Income tax benefit was $(0.3) million, or 28.0 percent of pre-tax loss, compared to income tax expense of $1.8 million, or 26.3 percent of pre-tax income, last year. The increase in the effective income tax rate was primarily attributable to decrease in pre-tax income and discrete income tax items associated with stock-based compensation.
- Net loss was $(0.8) million, or $(0.03) per share, compared to net income of $5.1 million, or $0.17 per diluted share, last year. Weighted average shares were 29.9 million this year compared to 30.0 million diluted shares last year.
Fiscal 2023 Year-to-Date Third Quarter Operating Results Overview
The following comparisons refer to the company’s operating results for the first thirty-nine weeks of fiscal 2023 ended October 28, 2023, versus the first thirty-nine weeks of fiscal 2022 ended October 29, 2022.
- Total net sales were $450.1 million, a decrease of $41.9 million or 8.5 percent, compared to $491.9 million last year. Total comparable net sales, including both physical stores and e-commerce, decreased by 11.3 percent.
- Net sales from physical stores were $360.0 million, a decrease of $36.1 million or 9.1 percent, compared to $396.1 million last year, with a comparable store net sales decrease of 12.3 percent. Net sales from physical stores represented 80.0 percent of total net sales compared to 80.5 percent of total net sales last year.
- Net sales from e-com were $90.0 million, a decrease of $5.8 million or 6.1 percent, compared to $95.8 million last year. E-com net sales represented 20.0 percent of total net sales compared to 19.5 percent of total net sales last year.
- Gross profit, including buying, distribution, and occupancy costs, was $119.0 million, or 26.4 percent of net sales, compared to $150.4 million, or 30.6 percent of net sales, last year. Buying, distribution, and occupancy costs deleveraged by 260 basis points and increased by $2.3 million collectively, predominantly due to occupancy costs, as a result of operating two net additional stores and carrying these costs against a lower level of net sales this year, partially offset by a decrease in distribution costs resulting from reduced freight costs. Product margins declined by 150 basis points primarily due to increased markdowns and estimated inventory valuation reserves.
- SG&A expenses were $141.4 million, or 31.4 percent of net sales, compared to $137.8 million, or 28.0 percent of net sales, last year. Primary SG&A increases were attributable to non-cash store impairment charges of $2.6 million and corporate payroll and related benefits expenses of $1.4 million, primarily due to the impact of wage increases associated with employee retention. These increases were partially offset by smaller reductions in store supplies and store payroll.
- Operating loss was $(22.5) million, or (5.0) percent of net sales, compared to operating income of $12.6 million, or 2.6 percent of net sales, last year, due to the combined impact of the factors noted above.
- Other income was $3.6 million compared to $0.9 million last year, primarily due to earning significantly higher rates of return on our marketable securities compared to last year.
- Income tax benefit was $(4.9) million, or 26.0 percent of pre-tax loss, compared to income tax expense of $3.7 million, or 27.2 percent of pre-tax income, last year. The decrease in the effective income tax rate was primarily attributable to a decrease in pre-tax income and discrete income tax items associated with stock-based compensation.
- Net loss was $(13.9) million, or $(0.47) per share, compared to net income of $9.8 million, or $0.32 per diluted share, last year. Weighted average shares were 29.8 million this year compared to 30.4 million diluted shares last year.
Balance Sheet and Liquidity
As of October 28, 2023, the company had $93.9 million of cash and marketable securities and no debt outstanding compared to $105.8 million and no debt outstanding at the end of the third quarter last year. The company ended the third quarter with inventories at cost up 0.8 percent per square foot while unit inventories were down 3.2 percent per square foot compared to last year.
Total year-to-date capital expenditures at the end of the third quarter were $10.5 million this year compared to $11.9 million last year. The company currently expects its total capital expenditures for fiscal 2023 will be approximately $13 million, inclusive of 7 total new stores and upgrades to certain distribution and information technology systems.
Fiscal 2023 Fourth Quarter Outlook
This year’s fourth quarter includes an additional week, making it a 14-week quarter compared to 13 weeks last year. Total comparable net sales through November 28, 2023, decreased by (6.5) percent with a comparable net sales decrease in physical stores of (13.6) percent and an increase in e-commerce comparable net sales of 11.0 percent. Based on current quarter-to-date comparable net sales results and current and historical trends, the company currently estimates that its fiscal 2023 fourth-quarter net sales will be in the range of approximately $172 million to $178 million, translating to an estimated comparable net sales decrease in the range of approximately (6) percent to (9) percent compared to last year. The company currently estimates its SG&A expenses for the fourth quarter of fiscal 2023 to be approximately $55 million to $56 million, pre-tax loss to be in the range of approximately $(5.0) million to $(8.0) million, and estimated income tax rate to be approximately 26 percent. The company expects its loss per share for the fourth quarter of fiscal 2023 to be in the range of $(0.12) to $(0.20) based on estimated weighted average shares of approximately 29.9 million. The company expects to have 248 stores open at the end of the fiscal year, a net decrease of one store from the end of the last fiscal year.
Fiscal 2024 New Store and Capital Expenditure Plans
The company expects its total capital expenditures for fiscal 2024 not to exceed $15 million, primarily for the construction of 4 new stores and continued upgrades to certain distribution and information technology systems.